The Great Indian Investment Bandwagon: Why there is an urgent need for clarity in the country’s investment landscape

10th Sep 2016
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The fact that the Indian startup ecosystem has firmly established its prominence on the global stage is no secret. According to a recent Assocham study conducted in association with the Thought Arbitrage Research Institute, India is the third largest tech startup hub in the world. With nearly 4,200 tech-based startups currently operational in the country, India lags only marginally behind the UK, which has 4,500 tech startups.

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Several startups, particularly those belonging to the consumer internet and e-commerce sectors, have witnessed exponential increase in scale as well as a massive rise in valuations. As a result, the country is today home to seven Unicorns – startups valued at more than $1 billion – putting the number of billion-dollar startups from the country at par with the combined number of Unicorn ventures from France, Japan, Israel and Singapore.

All’s not well: Investor clarity and why it has become the need of the hour

The massive growth that Indian startups have witnessed over the past few years has mainly been complemented by strong investor support. The year 2015 alone saw more than $9 billion being invested into tech startups from India, an amount that equals nearly 50 percent of the total investment that had been pumped into Indian ventures during the preceding five years. Most of these investments were secured on the basis of user traction and hyper growth claimed by the investee companies. Business fundamentals, such as sustainability and profitability, were put on a backburner, as investors and entrepreneurs both targeted greater scale and user aggregation on priority.

Several recent developments, however, have put a dampener on the mood surrounding the Indian startup community. There has been a recent flurry of startups either completely folding up their operations or pivoting their business models in order to survive in the market. According to reports, almost 30 angel and venture capital-backed tech startups across the country have had to close their operations due to a dearth of funds. Eleven of these ventures shut shop in the months of June and July itself. To further complicate matters, a recent independent survey conducted by Xeler8, a startup focussed research firm, has revealed that, since 2014, nearly one thousand Indian startups have had to wind up their operations. Most of these closedowns have occurred due to the absence of a sustainable business model and a failure to raise funds to support operations.

This alarming trend of startup shutdowns underlines why there is a need for clarity within the country’s investment community to maintain the momentum of the Indian startup ecosystem. Investors need to understand that hypergrowth and lofty future projections can no longer be considered to be the only metrics to judge a startup’s value and success; any prospective investment has to be backed up by financially sound day-to-day business operations and a focus on sustainable growth and scale.

Sealing the deal: aspects investors should look for in their potential investees

One of the key aspects that investors must look for in any venture before funding it is the value it adds to its end-user. Ensuring a 10X value addition to its solutions can result in greater customer stickiness for a venture’s products/services. This decreases the overall consumer acquisition costs and increases the lifetime value of the customer.

Another factor that should be considered during the funding process is the intellectual property rights (IPR), especially if the company being invested in is a completely tech-based venture. Companies with strong IP strategies have a greater chance of creating monopolies in their target markets, and as such should be given preference over similar ventures. The potential for market disruption and the impact of a startup’s USPs must also be taken into account before making the decision to fund it. Benchmarking by analysing precedence set by a venture’s peers in comparable sectors or with similar technology is generally a good idea.

Investors must also be aware of the product development stage in which they choose to become associated with the venture. Startups with a fully developed product often require heavier investments, while those with products in development stages need more time and patience and are relatively untested in the market. It is ideal to invest in ventures which have products in pilot stages, as they allow investors to adequately gauge if the product can gain market traction or not.

However, the one feature that needs to be given the most attention while evaluating a potential investee company is its team. The background of founders must be meticulously checked in order to ensure that they have the relevant industry experience that would be required to make the business a success, and to gauge whether they have the capability to build and manage large teams. Previous job experience in the sector that the startup is operational in, especially if a founder has worked with one of the top five firms in the industry, is considered to be a plus. The opportunity cost of making the entrepreneurial leap is also something which investors must consider. Founders with higher opportunity costs often have greater faith in their vision and are more likely to work harder to ensure their businesses achieve success.

The way forward

Funding is an integral part of a startup’s journey towards success, especially as it looks to scale its operations and expand its footprint into multiple markets. With their capital, in-depth industry experience and business networks available to them, investors play a key role in driving growth for their investee companies. In the long run, success, in India, will only be achieved by those investors and startups that focus on keeping their business fundamentals sound instead of succumbing to the lure of short-term gains.

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